An inspiration from Mainland China‘s incredibly successful Shanghai Gold Exchange guided India to develop a well-regulated spot gold exchange.

Turning An Idea Into Reality

India is the second-largest consumer market for gold and intends to create a national gold market with many resources available in the country. Several banks and trade groups presented a blueprint to the government to establish a physical gold exchange. The World Gold Council and several banks proposed the blueprint in August 2019 after consultations with the government.

The Importance Of The Yellow Metal

Throughout many centuries, gold jewelry was well known in India and often appear in weddings and religious festivals. Without instant access to banks, the service of storing assets is limited. As a result, a family’s jewelry collection assists as life savings account for many in the country. However, India purchases about 800 tonnes of gold a year but lacks a centralized space for physical trading. In contrast, many raised concerns about price transparency, the quality of the gold while dealing, and the limitation of ability for India to influence global prices.

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Plans In Action

Shortly, the government took actions to engineer a change from the burden of gold to foreign exchange reserves and shift into a financial asset traded alongside equities and bonds. Through years of discussions since 2015, the plans took off in 2018. India already has gold futures, but the physical trade remains opaque. By utilizing the new method of a spot exchange, this offers price transparency and liquidity. In fact, the finance ministry will approve the committee’s proposal and identify a regulator.

The Gold Exchange

The exchange would set a single nationwide benchmark with physical delivery across India and require importers to route their trade through its markets. Eventually, the importers would introduce a form of a futures contract, and the exchange would obtain a separate custom rather than the already existed trade. Due to government restrictions, banks are not able to buy or sell physical gold. London has been a global gold trading core for the longest time. However, China’s market has evolved into the world’s largest trading hub since the Shanghai Gold Exchanges in 2002. After relaxing the state price control, all imported gold which traded on the exchange will record as a national benchmark price.

The Trade

The gold exchange program will benefit many jewelers, refiners, and retailers. The physical exchange will now be able to trade through regulated platforms. The demand, supply, and price being transparent on these platforms will signify the end of high premiums. Besides, the leading importers of gold, which are the banks, will also benefit from this exchange. Currently, the banks are being denied to trade on Indian commodities exchange offering future contracts. Ultimately, the practice of a dedicated physical exchange for gold is already in place in China where all domestic and imported gold has to be bought and sold at the exchange.

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